Trump About To Trigger Greatest Trade Diversion Ever Seen

The last time US-China trade tensions escalated, China rerouted many of its exports through Southeast Asia . This time, however, Southeast Asian countries were hit hard, too.

Vietnam, a major destination of Chinese export-oriented foreign investment, exported $137 billion in goods to the US in 2024. While the 46% reciprocal tariff against Vietnam has since been suspended , the US is unlikely to tolerate such circumvention this time around.

The US has also imposed a 25% tariff on all imported automobiles . South Korea, Japan and Germany all export cars to the US market . While some of these exports may continue as tariff costs are absorbed or passed on to customers, others will divert their vehicles to alternative markets.

All told, billions of dollars in trade are being rerouted, with a tidal wave of diverted goods now headed for markets around the world.

The world has been here before. In the 1930s, the US enacted the Smoot-Hawley Tariff Act , which raised tariffs on thousands of imported goods in an effort to shield American industries during the Great Depression. The result was a rapid contraction of global trade.

What ultimately tipped the world over the edge wasn't direct retaliation against the US Instead, global trade collapsed as US trading partners turned on each other. Faced with a flood of diverted goods, they rushed to protect their own manufacturing by enacting trade restrictions of their own.

Similarly, today, we face a similar risk. The greater concern is not Trump's tariffs themselves or even the retaliation they provoke, but rather the resulting trade diversion and wave of protectionism they can trigger.

In some respects, the world may be in a more precarious position today than it was in the early 1930s.

For close to a decade, Western policymakers, including G7 members, have sounded alarm bells over“Chinese overcapacity .” China consumes too little at home and exports too much abroad , often using unfair non-market practices such as covert subsidization to undercut local prices.

Fears of deindustrialization have already led some governments to put new trade barriers in place. Canada, for example, placed a 100% tariff on Chinese-made electric vehicles to protect its own nascent industry in 2024. A flood of diverted Chinese imports will only heighten these pre-existing concerns.

At the same time, global trade rules meant to safeguard against protectionism have become brittle. The US has blocked the appointment of judges to the World Trade Organization's highest court , which is tasked with enforcing trade rules.

The resulting impunity has emboldened countries beyond the US to openly flout WTO rules. Indonesia, for example, continues to maintain a WTO-inconsistent export ban on nickel . Canada's electric vehicle tariff will likely be judged illegal under trade rules as well.

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Global trade at a crossroads

The Great Trade Diversion is set to put an already strained system to the test. There is still time for countries to reaffirm their commitment to international trade rules. Those same rules also allow countries to temporarily restrict trade when faced with a flood of imports.

The Canadian government can proactively identify sectors at risk of disruption and call on the Canada Border Services Agency to self-initiate investigations into vulnerable sectors to swiftly clear the procedural hurdles for imposing temporary import restrictions.

If countries stick to these rules, the global trading system can weather the storm. Just as possible, though, is a slide toward protectionism. Faced with a deluge of goods coming from China, the temptation to erect illegal trade barriers like the US already has will be high.

The global economy stands at a crossroads: one path leads to a reassertion of international cooperation and global rules; the other to a cascade of protectionist measures and a weakening of the very system that has enabled decades of economic growth and stability.

Wolfgang Alschner is Hyman Soloway Chair in business and trade law, L'Université d'Ottawa/University of Ottawa

This article is republished from The Conversation under a Creative Commons license. Read the original article .

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